France Telecom buys Orange

With a current customer base of around 21 million, it ranks alongside Telecom Italia Mobile and Deutsche Telekom behind Vodafone, the world’s biggest cellphone group.

France Telecom Chairman Michel Bon said he had feared thedeal would fall apart throughout the week-long negotiations.

"As you are aware, there were other people interested inOrange," Bon told Reuters. "It made life exciting." Both Dutch carrier KPN Telecom and MCI WorldCom of the U.S. Were keen on Orange and waiting in the wings.

In a major coup for Orange’s ambitious Chief Executive Hans Snook, the new company will retain the Orange name and will be run by Snook and his right hand man, Orange’s deputy CEO and Finance Director Graham Howe. A minority stake will be listed in London, Paris and New York in late 2000 or early 2001.

The French giant is paying around 6,741 euros per customer in a deal that will see Vodafone take just under 10 percent of non-voting France Telecom shares.

"The acquisition of Orange and the creation of New Orange is a major step in France Telecom’s international strategy to become a European leader and global player," Bon said.

Snook, who had vowed that any unwelcome Orange buyer would find an empty boardroom, added that the deal more than doubled Orange’s scale, reach and capacity and created a platform from which to build to a leading global wirefree business.

The Orange brand operates in seven countries around the world including Hong Kong and Israel, and Snook already has his eye on expansion into the United States.

"Obviously our initial focus is going to be on Europe, on integrating and consolidating what we’ve got," Snook told Reuters. "But to be a global operator we have to operate in at least North America as well."

Snook said he would look at new generation broadband UMTS (Universal Mobile Telecommunications System) licences in Europe and 700 megahertz licences coming up in the United States. He is not ruling out strategic alliances or partnerships.

As France Telecom shares pared early gains to slip 2.6percent to 140.8 euros by 0930 GMT as investors took profits on a strong opening performance.

"Strategically, it’s great news and the numbers are in linewith what we wre expecting. But I think some people who bought before the announcement are now selling into the strong open," said one senior trader in Paris.

Vincent Fravel, telecoms analyst at French brokerage KBC,said it was up to the former French monopoly now to convince the markets of its ability to make the investment profitable.

"It has given a strong sign of its determination to act fastin order to dominate the future," he said, setting a price target of 150 euros on the stock and raising his rating to "add" from "reduce".

France Telecom said the creation of so-called "New Orange"would generate pretax cash flow savings of over 800 million euros per year by 2003. Enhanced revenues are expected to generate over 450 million euros and operating cost and capital expenditure savings of over 350 million euros.

On a proforma basis, France Telecom said the new companywould have had consolidated revenues of around eight billion euros in 1999. The deal will be EBITDA (earnings before interest, tax, depreciation and amortisation) neutral in 2001 and thereafter.

The French company is paying 13.8 billion pounds in cash and11.3 billion in France Telecom shares. As a result of the deal, the French government will reduce its stake in its leading telecoms operator to 54 percent from 61 percent.

France Telecom said it would use the proceeds from thelisting of Orange to repurchase up to 8.4 billion pounds of the France Telecom shares held by Vodafone, which is not allowed to dispose of any stock for six months after issue.

The deal is conditional on European regulatory approval, butFrance Telecom said it expected to complete the deal in late July or August 2000.

France Telecom was advised by Morgan Stanley Dean Witter,Credit Suisse First Boston and Rothschild, while Vodafone was adivsed by Goldman Sachs and UBS Warburg. Orange was advised by Dresdner Kleinwort Benson and Donaldson, Lufkin & Jenrette.